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CFP® Study Tip

Government Pension Benefits

In the March e-newsletter, I provided two questions about RRSPs. The problems and solutions are as follows:

Question One

The following deposits were made into a spousal RRSP.

Year 2007 $4,000
Year 2008 $2,000
Year 2009 $3,500
Year 2010 $1,000
Year 2011 $0

The deposit of $4,000 made in the year 2007 is withdrawn in the year 2011. In whose hands is it taxed?

  1. Taxed in the hands of the contributing spouse
  2. Taxed in the hands of the recipient spouse
  3. Taxed only when all deposits in the spousal plan are withdrawn
  4. Taxed on a 50/50 split bases between spouses

Answer:   a. Taxed in the hands of the contributing spouse

Rationale: The attribution rules apply to withdrawals from a RRSP. In the year of deregistration (2011), and the two previous calendar years (2010 and 2009), any contributions made are taxed in the hands of the contributor. In 2011, 2010 and 2009, a total of $4,500 [0 + $1,000 + $3,500] was contributed to the RRSP. Therefore, any amount up to $4,500 will be taxed in the hands of the contributor, when withdrawn in 2011.

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Question Two

Which of the following statements is (are) correct about the RRSP Home Buyers’ Plan?

  1. The plan is only available to a first-time purchaser of a Canadian principal residence
  2. The maximum withdrawal is $15,000
  3. All withdrawals must be made in the same calendar year
  4. The maximum repayment term is 15 years from the date of the withdrawal

  1. 1 and 3
  2. 1 and 4
  3. all of the above
  4. 3 only

Answer:  d. 3 only

Rationale: Statement 3 is correct, but statements 1, 2 and 4 are incorrect.

Statement 1: A first-time home buyer includes a party who is either purchasing a house for the first time, or who has not owned a house and lived in it as a principal residence for the last five years.
Statement 2: The maximum allowable loan from the RRSP is $25,000 per individual
Statement 4: While the RRSP loan must be paid back within 15 years, the repayment period starts the second calendar year following the year the withdrawal was made.

In this e-newsletter, I will discuss the government pension benefits that an individual is entitled to receive in Canada.

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Old Age Security (OAS)

Eligibility: To receive OAS in Canada, there are two categories:

Category 1: To receive a full pension, the individual has lived in Canada from age 18 for periods totalling at least 40 years. To receive a partial pension, the individual was resident in Canada for a minimum of 10 years. A credit of 1/40th is given for each year of residency. For example, if an individual is a Canadian resident for 20 years, half benefits are due (20 years x 1/40th).

Category 2: The applicant was born on or before July 1, 1952. Between the time the applicant turned 18 and July 1, 1977, he or she must have lived in Canada for some period of time. Also, the applicant must have lived in Canada for 10 years immediately before the application for a pension was approved.

Old Age Security (OAS) Benefits

OAS benefits are paid to eligible individuals who are 65 years of age or older. In the year 2011, the full benefit is $524.23 monthly or $6,290.76 annually. OAS payments are indexed to inflation quarterly. As mentioned under Category 1, the individual must be a Canadian resident for 40 years after reaching age 18, to obtain full benefits.

A partial benefit is paid for OAS if the individual is a Canadian resident for at least 10 years after the age of 18.

The benefit is:

If an individual is resident for 20 years this equals:

There are three situations where absence from Canada does not impair the OAS residence requirement:

  • Absences that do not exceed one year and are not associated with residence in another country;
  • Absences while employed by the federal or a provincial government, by a Canadian firm or an international agency, or as a missionary; and
  • Absences for the purpose of attending a school or university.

Benefits increase every quarter (first day of January, April, July and October) in line with inflation.

OAS Pension – 2011 (Payable from age 65)

  • Application for OAS should be made at least six months prior to eligibility and payments usually commence the month after eligibility begins.

  • Benefits can be sent to recipients who are residing outside of Canada if they resided in Canada for 20 years after age 18. Otherwise, recipients can only receive payments for six months while out of the country. Payments resume on return to Canada.

  • Taxation: OAS is added to the recipient’s income for tax purposes.

  • For 2011, if the individual’s net income exceeds $67,668, there is a clawback of the benefit. The clawback is 15% of net income above $67,668. If the individual has net income of $87,668 ($20,000 excess), the clawback would be $3,000 ($20,000 x 0.15).  An individual is not entitled to OAS benefits if he or she earns $109,607 ($41,919 above the limit) or more.

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Guaranteed Income Supplement (GIS)

A monthly supplement to OAS is dependent on an income test and the amount paid differs depending on whether the individual is married, single or divorced. GIS is not taxable. The GIS in 2011 for a single person is $661.69 monthly ($7,940.28 annually)

To be eligible to receive the Guaranteed Income Supplement one must: be age 65 or older; be in receipt of the Old Age Security pension; meet certain income requirements; and be residing in Canada.

Benefits increase every quarter (first day of January, April, July and October), based on inflation.

The Allowance

  • This benefit is based on the following conditions:
  • The individual is aged 60 to 64;
  • The individual’s spouse or common-law partner receives, or is entitled to receive, the Old Age Security retirement pension and the Guaranteed Income Supplement;
  • The individual is a Canadian citizen or resident at the time of application;
  • The individual must have lived in Canada, since the age of 18, for a minimum of 10 years.

Besides the above benefits, the individual may be entitled to Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) benefits.

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Canada and Quebec Pension Plan

CPP/QPP provides earnings related pensions for working Canadians and came into effect January 1, 1966. It is portable and covers all employed individuals 18 to 71, except casual workers. CPP/QPP contributions are based on contributory earnings. Contributory earnings cover earnings between a floor (year’s basic exemption) and ceiling (year’s maximum pensionable earnings).

Combined CPP/QPP Contributions

The employer and employee must contribute 9.9% of contributory earnings for 2011. The employer and the employee pay an equal amount of 4.95% each in 2011. Self-employed individuals pay 9.9% of contributory earnings. Contributors receive a statement of contributions or can apply for their record annually. All CPP/QPP contributions made by the employer are tax deductible by the employer and CPP/QPP benefits are taxable to the recipient.

Benefits must be applied for by the contributor, survivor, spouse/common law partner or children.

Average Monthly Pensionable Earnings (AMPE)

Contributions are made to CPP/QPP if the individual’s earnings are at least $3,500. This is the floor amount. The yearly maximum pensionable earnings (YMPE) amount or ceiling on which contributions are calculated is $48,300 for 2011. The average annual pensionable earnings over the last five years are $46,080.

The average monthly pensionable earnings is the average annual pensionable earnings over the last 5 years divided by 12 = $3,840.00 ($46,080 ÷ 12).  The AMPE (year 2011) maximum is $3,840.00. The monthly retirement pension at age 65 is 25% of the AMPE (maximum), and is indexed to inflation each year. This equals $960.00 ($3,840.00 x 0.25) for 2011.

Reduced and Increased Retirement Pensions from CPP/QPP

If the pensioner has “wholly or substantially ceased working” from age 60 on, a reduced CPP/QPP pension can be taken (reduced by 0.5% per month / 6% per year prior to age 65).  If an individual takes their pension at 60; they will receive 70% (deduct 6% x 5 years) of the normal benefit.

For 2011 this amounts to $672 ($960 x 70%) per month.

Pension benefits received under CPP/QPP can be delayed up to age 70. The pension income is increased by 0.5% per month / 6% per year, after age 65. An individual who chooses to take their pension at 70 would receive 130% of the normal benefit (add 6% x 5 years). This amounts to $1,248.00 ($960 x 130%) per month for the year 2011.

Other Benefits from CPP/QPP

CPP/QPP also offers benefits for: a surviving spouse (e.g., $576.00 for 2011, if age 65 or older); orphans or a child of a disabled contributor (e.g., $218.50 for 2011 for CPP); and for a disabled surviving spouse (e.g., $960.00 if age 65 and over). CPP/QPP also provides a lump-sum death benefit which is a maximum $2,500 for 2011.

In the next e-newsletter, I will cover key topics in investment planning.

Good luck on your studies.

Sincerely,

Ron Foran, CFP, CFA, CLU, FCSI
President, Foran Financial Institute


Note: Advocis does not award the CFP® and Certified Financial Planner® designation. The right to use the marks CFP®, CERTIFIED FINANCIAL PLANNER® and CFP(logo) is granted under licence by FPSC to those persons who have met its educational standards, passed the FPSC's Certified Financial Planner Examination, satisfied a work experience requirement, and agreed to abide by FPSC Code of Ethics.